Fitch: Strong Institutional Framework for German Subnationals

Fitch Ratings says in a new report that the institutional framework for German states (Laender) and municipalities is strong, supportive and ensures financial transparency.

Fitch believes that the institutional framework effectively regulates the local and regional governments (LRGs) responsibilities as well as their funding sources and the relationship between them and with the central government (the Bund). While the Laender face fairly low fiscal flexibility they receive from the Bund a large part of common taxes (personal income tax, corporate income tax, VAT and withholding tax), together accounting for 70% of the tax proceeds of the entire sector. Municipalities also have some leeway on their business taxes, which represented 46% of their total tax revenue in 2014.

The Laender and, to a lesser extent, the municipalities benefit from a strong and far-reaching financial equalisation system, which aims to balance out the financial disparities between them. This is achieved through sharing VAT and other taxes among the Laender, and additional federal transfers to the weaker states.

The LRGs are required to publish a budget and an execution report together with a medium term financial plan. Although most of the Laender publish this information on their respective web pages, this is not yet common practice for all municipalities. The aggregate data for the sector is available on the Federal Ministry of Finance's and on the German Statistical Office's website. Laender's budgets are usually based on cash accounting while municipalities have adopted accrual accounting.